Tokens vs Cryptocurrencies

People ask me frequently about investing in the blockchain ecosystem and which investments I would recommend. Most have heard of Bitcoin and Ethereum, and they might have read an article that promoted a new coin, promising to be a phenomenal investment. In the past few weeks, the US Securities and Exchange Commission has become more vocal about regulating many new Initial Coin Offerings or ICOs, claiming that most represent securities; non-security “asset” offerings would still be permitted, but it can be difficult to show whether your offering qualifies for added oversight. The first category is called a cryptocurrency or coin; the second category is called a token or digital asset.

On first glance, the hundreds of coins available seem overwhelming, the equivalent of opening up the stock pages in the Wall Street Journal. And also at first glance, all of these coins appear to be very similar. But there are some important differences between currencies and tokens, and it is important to examine the two classes differently.

First, let’s take a look at cryptocurrencies. The oldest and largest of these is Bitcoin, launched in January 2009. Currently, there are 16.5 million of these coins in circulation, and the price of a bitcoin has fluctuated between $4000 and $5000 over the past month, for a total market value of about $70 billion as I write this post. Ethereum is the second most important cryptocurrency, with 94.5 million coins in circulation and a market price of about $300, for a total market capitalization of about 28 billion. There are nine other coins with market values over $1 billion, 23 more worth between $100 million and $1 billion, plus several hundred more with lower capitalization levels.

The key attributes of a currency include:

  • The currency is tied to an open and publicly accessible blockchain.
  • Anyone can send, receive, and earn (mine) coins or fragments of coins through participation in the blockchain.
  • The owner has full control at all times, helped by a public and private key system tied to the cryptocurrency wallets.

Since the primary purpose of a coin is to enable commerce, it is logical that there is a strong network effect driving bitcoin to higher market valuation and eventually higher market share. The more people accept a specific coin, the more popular that coin becomes, creating a virtuous cycle of growth. Most of the popular alternatives to bitcoin emphasize different characteristics that make them useful for people with secondary objectives: Monero features transaction anonymity and privacy beyond bitcoin. Dash provides transaction privacy and is accepted by over 80 online merchants around the world. IOTA emphasizes a new ecosystem concept of Internet of Things interactivity; in this ecosystem, billions of sensors will communicate with each other and with controllers with a new standard based on micropayments without relying on today’s centralized network owners. Ethereum’s primary purpose is to enable smart contracts and distributed applications (or dapps), rather than a traditional commerce ecosystem; an ecosystem of dapps can be considered a commerce solution at a more abstract level. Waves is a platform for issuing, trading, and managing digital assets securely and easily; more than 4,000 tokens have been issued based on the Waves platform. Ripple emphasizes transaction utility and is used by several dozen banks and nonbank financial institutions (although Ripple has some unusual properties and is centrally managed).

In the past year, dozens of organizations have created new coins as part of managed cryptocurrency investment funds. These range in value from $1 million to $500 million or more. The funds are focused on the blockchain ecosystem, taking advantage of the recent explosion of new projects that approach the magnitude of the level of traditional venture investment.

In contrast, a token is a digital asset for dapps within a blockchain ecosystem, usually Ethereum or Waves. The tokens have no inherent value by themselves, but represent the value of the dapp. Unlike currencies, tokens are held inside the project network. Also, where many currencies have been capped at some fixed number of coins or loosely fixed with a small inflation factor associated with the reward system for that coin, there is nothing preventing an organization from issuing more tokens.

Tokens, like currencies, exist in binary form and are stored on digital appliances like computers and smartphones, but the control for access and exchange of these assets is not on a public blockchain but rather on private ledgers maintained by individual companies or project teams. For example, BurgerKing Russia launched a new token called the Whoppercoin. Consumers who purchase Whopper sandwiches in certain restaurants receive one token for every ruble spent; they can redeem 1700 tokens (earned after purchasing five or six burgers) for one free Whopper. There is no public exchange for Whoppercoins; the value varies only with the price of the hamburger, and the token will cease to have any value whenever BK Russia decides to cancel the “frequent buyer” promotion.

Initial Coin Offerings or ICOs for cryptocurrencies and digital asset tokens have exploded in the last year, as shown in this chart from Smith & Crown (published September 8, 2017):

Note: Smith & Crown considers all blockchain offerings to be “tokens,” regardless of the intent for monetization of the project asset.

It seems likely that the industry will slow down over the next several months as projects come to grips with the recent decisions by regulators in the US, China, and many other countries to rein in the excesses and scams that make this segment look like Florida land investment schemes from the 1920s or silver mines in the 1880s.

Our own project, StreamSpace, features two blockchains. StreamShares are the currency used for transactions on the network. They are a currency for which we are planning an ICO, launching October 23rd, 2017. The other blockchain, called SpaceCredits, rewards contributors to the cloud storage network. These tokens will be issued and mined, but there will not be a financial event where the project attempts to raise money to support this aspect of the network. Still, we would consider these to be currencies as well, and it is possible that the coins could be traded for other currencies through one or more exchanges.

The blockchain industry is evolving rapidly, and there will be new ideas and business models that may change the conventional industry structure assumptions within another year or two. The Waves platform has opened up distributed blockchain applications to thousands of project teams that would never have considered launching their own coins or tokens in the past. And hundreds of large technology companies are experimenting with blockchain development projects under Ethereum and other protocols; these will be centralized applications under the control of the parent tech company, with the tokens acting as tools to support the application rather than as funding mechanisms in their own right.


Downes, Brant, Smith + Crown. “Trends in Token Sale Proposals,” Published September 8, 2017. Accessed September 11, 2017.